The new UPI merchant discount rate framework introduces a 0.4% MDR on person-to-merchant transactions above ₹2,000, capped at ₹300 for transactions of ₹75,000 and above. According to reports from The Economic Times, consumers will not be charged under this new structure. The framework takes effect from October 15, representing a significant change from previous MDR rates. Additionally, a flat concessional MDR of ₹5 will be applicable on specific merchant categories such as railways, telecom services, insurance, and fuel for transactions above ₹2,000. Government sources indicate this move aims to strengthen the UPI ecosystem's safety and sustainability.
Businesses receiving UPI payments above the exempted ₹2,000 per transaction threshold will pay 18% GST on the applicable MDR, as reported by The Economic Times. The effective cost for merchants is likely to be 47.2 basis points on eligible UPI transactions, rather than the headline 40-bps MDR. One basis point equals a hundredth of a percentage point, making the additional GST cost 7.2 bps equivalent to the MDR rate. GST is paid by the service provider who typically recover the amount from whoever receives service. However, GST-registered merchants eligible for input tax credit may be able to set off the tax component through the Input Tax Credit mechanism.
The additional tax would raise the cost of a ₹5,000 UPI payment to ₹23.60 from an MDR of ₹20, according to The Economic Times. However, GST-registered merchants eligible for input tax credit may be able to set off the tax component through the Input Tax Credit mechanism, which allows registered businesses to lower final tax liability by claiming credit for GST paid on purchases linked to business. The charges remain well below card fees and exempt many smaller transactions.
A 40-basis-point MDR on UPI transactions could create a substantial revenue pool, with issuing banks and UPI apps receiving substantial portions of this estimated revenue. Merchant-side payment apps and acquiring banks will also capture significant revenue shares, as reported by The Economic Times. This levy aims to sustain UPI infrastructure and support its continued expansion. Everyday person-to-person payments and small transactions will remain entirely free of any charges, ensuring the system remains accessible for regular users while generating revenue for the ecosystem's growth and security enhancements.
